Classification of service

Though the service is taxable, frequently the assessee locks horns with the department over the issue of classification of service; i.e. whether the service be classified under “Renting of Immovable Property” or “Business Support Service”.

One may wonder does this classification matter when there is no change in rate of service tax. Classification is of utmost importance due to exemptions, stay, etc. granted to various services. One may be amazed to know that if the transaction gets classified under renting of immovable property, it may not be liable to service tax due to stay granted by Delhi High Court in case of Home Solutions Retails Ltd. However, under business support service, as there is no such stay, service tax is leviable @ 10.30%.

Moving on to the conceptual difference between these categories; renting of immovable property covers plain leasing of space, whereas business support service includes providing office space along with other facilities like‐ office utilities, reception, lounge, competent personnel to handle messages, internet, telecom, pantry, secretarial service and security, etc.

Therefore, since serviced offices provide services incidental to leasing as discussed above, “Business support service” seems the most appropriate category under serve tax laws.

Leasing of office equipments is liable to VAT or Service Tax

VAT or CST is leviable on sale or purchase of goods. However, service tax is on rendition of services. Question arises whether leasing of office equipments like computers, laptops, etc. are covered within VAT/CST or Service Tax law. Since there are no goods sold, this transaction should not be liable to VAT. However, by virtue of an amendment in the Constitution of India, leasing of goods is subject to VAT. Service Tax may also cover this transaction under “supply of tangible goods”. However, if such services are incidental to leasing of premises, it may get classified under “Business Support Services”. The main parameter to be looked upon is whether the effective possession and control of such equipments is passed on to the lessee. If yes, then the same may be liable to VAT. However, if the lessor has the effective control and possession then it should be taxed under Service Tax.

Additional Charges

The recovery of other charges like attending phone calls and visitors, car parking, conference room for meetings, video conferencing facility, internet connections, printing or photocopying charges, etc. shall be taxable, under the category of “Business Support Services” under Service Tax law, as they are inherent part of consideration of service provided by the serviced offices. Further, recovery of charges of consumables like tea or coffee, eatables, drinks, etc. would be liable to VAT, provided the charges exceeds the basic exemption limit of ` 5,00,000 in a financial year as the charges recovered are towards sale of goods.

Interest

If interest charges are recovered, the same may not be liable for Service Tax as these interest charges are recovered for delay in payment and the same does not form part of consideration for providing service. However, it is possible that the department officers may take a contrary view and may try to levy Service Tax on such interest.

Security Deposit

Generally the interest free security deposit are refundable and therefore, may not be subject to Service Tax. However, if a refundable deposit is forfeited for non payment of rent, such deposit would take color of rent and therefore, shall be taxable under Service Tax law.

Recovery of costs

If some expenses like outgoing call charges or post charges, stationery costs are recovered on cost to cost basis in view of contractual terms and other conditions, service tax may not be applicable due to pure agent concept. However, the matter is not free from doubts and applicability of tax should be examined in light of actual facts on a case to case basis.

For the new business set ups, these serviced offices offers great comfort with no capital expenditure and therefore, this concept is growing day‐by‐day. The above are few issues relating to these offices. However, there are number of issues remaining unsolved. One may wait for GST to come out with solutions.